For companies developing intellectual property, structuring decisions have become more complicated due to the 2017 Tax Cuts and Jobs Act. In navigating a host of business decisions, startup companies must consider several changes to the Internal Revenue Code.
The first major decision that a startup must make is the form of their business. Generally, startups can be formed as a limited liability company (typically a “flow-through” entity for U.S. tax) or a C corporation. A common structure in the past for startups generating intellectual property was for all of their worldwide rights in the IP to be held in a single LLC. As a result, all IP licenses (e.g., with both U.S. and non-U.S. entities) would be with the single LLC, and any resulting revenue or royalties from these licenses would be paid and taxable to the single LLC. Prior to the 2017 act, this structure was a simple and efficient solution for startups because it provided a single tax at the owner’s individual tax rate (as compared to the C corporation’s higher rate resulting from its income’s double taxation) and there were potential benefits of losses flowing through.
